I am 64 years old. Should I move £20,000 a year from my pension into an Isa after the budget inheritance tax raid?

At 64 years old, I am thinking about collecting my pensions through a withdrawal.

Now that from April 2027 my pension fund will be included in my estate for inheritance tax purposes, is there any advantage in keeping it in a pension scheme?

Should I instead withdraw the amount annually to fund my lifestyle plus £20,000 to invest in an Isa until the pension fund is depleted?

This is Money’s Tanya Jefferies responds: Chancellor Rachel Reeves announced plans in the Budget to make pensions subject to inheritance tax, like other assets such as property, savings and investments, from April 2027.

This has disrupted many families’ plans to bequeath unspent funds to younger generations.

Wealthy people could face a “double tax hit” on inherited pensions of up to 70.5 per cent under the new rules.

Therefore, many people like you are looking for ways to protect their wealth under this future tax regime.

We put your question to an experienced financial expert who answers below.

Ray Black, Chartered Financial Planner and CEO of Money Minder Financial Services, responds: Even with upcoming inheritance tax changes from April 2027, keeping your money in a pension scheme still has some important advantages.

In your situation, taking money from your pension and putting £20,000 each year into an Isa until the fund is empty could work, but there are some really important things to consider.

The advantages of pensions

Tax-free growth: Like Isas, pensions allow your investments to grow tax-free while they are invested.

This means your money has a greater chance of increasing in value and growth over time compared to typical taxable investments.

Withdrawal tax management: While Isas allow you to withdraw your money tax-free at any time, pensions still allow you to withdraw 25 per cent of your money tax-free.

While the residual fund is taxed as earned income in the tax year in which it is withdrawn, you can potentially still withdraw that income in a way that helps minimize your tax bill and helps ensure your money lasts.

If you started withdrawing large amounts of your cash tax-free, the amount remaining for future tax-free withdrawals would decrease.

Therefore, it is important to carefully plan tax-free cash and income withdrawals.

Spouse-to-spouse inheritance tax exemption: A key benefit of pensions is that when you die, your pension can be transferred to your spouse without them having to pay inheritance tax, thanks to the spouse-to-spouse inheritance tax exemption.

This means that for married couples, pensions are still a good way to protect and transfer wealth efficiently between them.

Inheritance tax thresholds: If you are married with children and plan to leave your main home to your direct descendants (children, stepchildren, grandchildren), your combined estate, including your pension, will need to be more than £1 million for inheritance tax to be an issue.

This figure reduces to £650,000 for married couples without children and £325,000 for single people without children.

For many people, this means that even after the proposed changes to include pensions in inheritance calculations, there will still be no immediate or long-term concern.

If your estate is large enough to trigger an inheritance tax, it will be worth exploring strategies to reduce your family’s future inheritance tax liability, regardless of any inheritance tax changes that come into effect.

This should be done in person with a suitably qualified and experienced independent financial advisor.

Take the time to review your position: It’s worth noting that these new rules won’t come into effect until April 2027.

This gives more than two years for further adjustments or even a rethink by the Government based on public reaction and feedback from pension providers.

There is a chance that these rules could be changed, especially if they cause significant concern among savers, so it is important not to have a knee-jerk reaction in the short term.

Move £20,000 a year from a pension to an Isa

Consider the following points before deciding if this approach would work for you.

Balancing tax-free growth and paying taxes: Both pensions and Isas allow your money to grow tax-free, as explained above.

Isas have an advantage when it comes to withdrawals as they are always tax-free (under current rules).

Pensions give you 25 per cent tax-free, but you’ll pay tax on anything you withdraw after that. If you withdraw too much from your pension, you may have to pay income tax at a higher rate, so it’s important to plan ahead.

Investment options and charges: Isas are great for flexibility and tax-free income, but your pension can offer competitive charges and more diversified investment options.

It’s worth comparing how each option could affect your savings over time and, most importantly, don’t simply take money out of your pension and put it into cash-based Isas, unless it’s money you expect to spend in the short term .

Over the long term, cash funds rarely manage to keep up with inflation, as we have all witnessed over the last 25 years or so.

Avoid knee-jerk reactions and plan carefully: Some people are anxious about possible tax changes and consider withdrawing their pension funds quickly.

However, hasty decisions can be costly. You should think about your long-term needs and how to best secure your financial future, especially if you hope to live a long and healthy retirement.

Keeping an eye on events and being flexible with your financial plans can be very helpful.

Speaking with an independent financial advisor can help you make informed decisions that work best for you, your family, and your financial goals.

Security and legacy: Using your pension too quickly could leave you with less money in the future.

Pensions have traditionally been a good bet for long-term savings and a tax-efficient way to pass wealth on to the family.

A balanced approach that considers both pensions and Isas might be a better strategy.